Perspectives

Pot: It’s medical, it’s recreational, it’s business

The feds are moving faster on financial services for the marijuana business than they are for legalization

By Kevin Riach
10-20-2015

Last year, Minnesota joined the 23 other states that have legalized medical cannabis.  Legalization has generated new business opportunities for the producers and distributors of medical cannabis, health care providers, and the companies that serve them.  Further relaxation of Minnesota’s prohibition on marijuana is likely.  As the laws criminalizing marijuana are relaxed, further business opportunities will emerge.  The experience of businesses in Colorado, Washington and other states on the leading edge of legalization confirms that marijuana is a lucrative industry.  For example, legal sales of medical and recreational marijuana in Colorado topped $700 million in 2014.  Nationwide, the amount is estimated at nearly $3 billion.

However, federal law has lagged behind the widespread state legalization of medical cannabis. Production and distribution of marijuana (and cannabis) remains a federal crime under the Controlled Substances Act.  The FDA classifies marijuana as a Schedule I drug (along with heroin and LSD), which means that it cannot be prescribed and research on its medical benefits is highly restricted.  Moreover, the federal prohibition on marijuana inhibits highly regulated industries such as banking and health care from taking advantage of the new business opportunities afforded by legalization.  Fortunately, the federal government has begun to address the disconnect between state and federal laws regarding medical marijuana.

For example, under the Bank Secrecy Act (BSA), banks may face criminal liability for failing to report attempts to deposit the proceeds of illegal activity.  Processing of such funds may also constitute the federal crime of money laundering.  Until recently, because of these prohibitions, banks were understandably fearful of offering financial services to medical marijuana businesses. Banks would not accept deposits from such businesses, which limited businesses’ ability to generate payroll, pay taxes and bills and obtain financing.  Business owners coped with these problems by either operating on a strictly cash basis or disguising the true nature of their activities from the bank.  As could be expected, these work-arounds created their own problems and did not serve the communities in which the businesses operated.

Ultimately, the Department of the Treasury could no longer ignore the practical problems posed by the lack of access to financial services for medical marijuana businesses.  In February 2014, it published guidance that laid out the steps the banks could take to avoid liability when working with medical marijuana businesses. Significantly, the guidance explained that its implementation “should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”  In other words, the government not only expects that legitimate businesses will emerge in states that legalize medical marijuana, but it actually aspires to enhance the ability of those businesses to obtain financial services.  In an August 2014 speech to financial services professionals, the Treasury Department’s director of Financial Crimes Enforcement confirmed the government’s position: “So, from our perspective the guidance is having the intended effect.  It is facilitating access to financial services, while ensuring that this activity is transparent and the funds are going into regulated financial institutions.”  Those are the remarks of Jennifer Shasky Calvery, director of Treasury Department Financial Crimes Enforcement Network, 2014 Mid-Atlantic AML Conference, August 12, 2014.  This message of federal support for medical marijuana businesses is directly at odds with the federal prohibition on the production and sale of marijuana, and it highlights how the disconnect between state and federal law is untenable.

Despite the stubborn federal prohibition on marijuana, the trend is toward further liberalization of federal laws and regulations that have an impact on medical marijuana businesses. The December 2014 Congressional Spending Bill included a provision that de-funded any Department of Justice activity supporting prosecutions of individuals involved in the otherwise legal manufacture, distribution or use of medical marijuana.  In March 2015, a bi-partisan group of senators introduced the CARERS Act, which reschedules marijuana as a Schedule II substance and provides a statutory safe harbor for banks and credit unions serving lawfully operating medical marijuana businesses.  The CARERS Act has not yet been the subject of Congressional debate, but it is slated for committee hearings this fall.  Other recent efforts in Congress involve changing Section 280E of the IRS Code, which bars deduction of business expenses for any business trafficking in a Schedule I drug.  For example, the Small Business Tax Equity Act of 2015 would provide an exception to Section 280E for lawfully operating medical marijuana businesses. 

The nationwide trend is clearly moving in the direction of further legalization of medical and recreational marijuana.  The federal government has been slow to adapt to this trend, but in the past year has finally begun to see the writing on the wall and change its policies accordingly.  The resulting change in federal law and regulation has been positive for business owners seeking to take advantage of the new opportunities posed by the nascent medical marijuana industry.

Bio

Kevin Riach defends clients in a wide variety of white collar criminal, civil, and regulatory matters. He was recognized as a 2011 “Minnesota Attorney of the Year” by Minnesota Lawyer magazine.

Connect

Advertisement